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The Columbia Energy case paved the way, but what's the holdup?
Anecdotal evidence suggests that there are inefficiencies in how companies procure their employee benefit programs. These programs can profit from lessons learned from the property and casualty industry, including concepts such as unbundling, self-insurance and captive insurers.
While placing benefits in a captive is no panacea, for many companies it can facilitate better management and long term cost savings.
The fundamental question, however, is whether a captive will add value to the management of employee benefit risk? Our experience is that the utilization of a captive mandates a constant review of loss data and a thorough study of the component parts of a premium–leading to improved risk management. Involving a captive also encourages discipline and supports better loss control and claims management.
The insured, in other words, no longer pays a premium and transfers risk, but manages and measures risk by studying the financial impact of loss.
Employee Retirement Income Security Act of 1974 is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for the individuals in these plans.
ERISA requires plans to provide participants with information, including important facts about the plan's features and funding; it provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a grievance and appeals process for participants to get benefits from their plans; and gives participants the right to sue for benefits and breaches of fiduciary duty.
ERISA's prohibited transaction rules ordinarily would prevent employers from insuring or reinsuring their employee benefit plans through captives. However, ERISA authorized the U.S. Department of Labor to grant two types of exemptions from the prohibited transaction rules:
Class exemption–this may be relied upon by any employer meeting the conditions in the exemption;
Individual exemption–this can be relied upon only by the employer that applied for the individual exemption.
The DOL granted a class exemption allowing an employer to use its captive to insure or reinsure employee benefits plans if the captive derives no more than 50% of its annual premiums from related business. Therefore, at least 50% of the captive's business must be unrelated third party risk. This requirement was still a major hurdle since most captives focus on related risk and are not interested in exposing risk capital to unrelated business.
Fortunately, Columbia Energy and Archer Daniels Midland have overcome some of the DOL obstacles, paving the way for other organizations.
Columbia, ADM & EXPRO
